European Elections and Gold

The most commonly cited bullish arguments in favor of gold right now are the
problems faced by the Old Continent, mainly the elections in certain countries.
So let's analyze them individually to consider their potential impact on the
gold market.

On March 15, the general election in Netherlands will be held. The fear is
that the right-wing Party for Freedom might win. The party is anti-immigration,
anti-Islam and it could try to withdraw the Netherlands from the EU. Geert
Wilders, the leader of the party, is ahead in most polls, but the lead is narrowing.
Anyway, the Netherlands' exit from the EU is highly unlikely. First of all,
even if the Party for Freedom wins, it will probably be unable to form a government
(due to its proportional system, no political party has ever won an outright
majority in Netherlands - and other parties declared that they will not form
a coalition with the Party for Freedom). But even if it is does win and organizes
a Nexit referendum, it would probably lose, as most of the Dutch are in favor
of the membership within the EU (and it is noteworthy that referenda are not
binding under the Dutch constitution). Hence, although the Dutch elections
will be closely watched, their significance should not be overstated, especially
given the small size of the Dutch economy. However, these results could help
set the stage for EU elections later in 2017. Hence, the victory of the Wilders
could boost the safe-haven
bids for gold as a hedge against the French presidential election, which
comes on April 23 (the first round) and May 7 (the second round).

When it comes to France, the biggest threat is that Marine Le Pen, the leader
of the anti-Islam and Euroskeptic National Front, will win, since she pledged
to hold a referendum on France's membership in the EU. However, the polls (can
we trust them any longer?) predict that Le Pen will win in the first round
of voting, but lose in the run-off. You see, if she triumphs in April, it is
likely that Socialists (or Republicans) will strategically vote to prevent
the National Front from taking the Presidency. And even if she becomes the
President, she would probably have to change the constitution to hold a referendum
on the French exit from the EU. However, before the election, and especially
after the potential success of Le Pen in April, gold may get a boost as a hedge
against the Frexit (which would probably end the European bloc we know). But
after the second round of elections, the price of gold should decline, since
the biggest uncertainty will vanish. As we repeated many times, geopolitical
events provide only short-term support for the price of gold (in contrast to
banking crises, which, by the way, is still possible in Italy). As the chart
below shows, the Brexit vote caused only a short-term rally in gold prices.

Chart 1: The price of gold in the aftermath of the 2016 referendum on the
British exit from the EU.

The last key election in Europe will be held in Germany on September 24. Angela
Merkel is running for a fourth term as a Chancellor and she is expected to
win, although her lead has dramatically narrowed recently. However, she has
not lost support in favor of the nationalist Alternative for Germany party,
whose growing popularity worries investors the most, but in favor of the Social
Democrats. Hence, even if Merkel loses, the power will retain in the hands
of mainstream, pro-EU politicians. So it seems that German elections may be
the least supportive for the yellow metal, however investors should remember
that a lot could happen before September. For example, another terrorist attack
in Europe may significantly affect the prospects of elections.

2017 will be an interesting year, to be sure. Actually, it is likely to mark
the most volatile political risk environment since World War II according to
the Eurasia Group.
The French presidential elections probably create the biggest political risk,
although elections in the Netherlands and Germany may also shake the markets.
Other political risks include: the Iran presidential election, North Korea's
nuclear program, more and more authoritarianism in Turkey, the situation in
the Middle East, the possible early elections in Italy, the actions undertaken
by Russia, the unfolding Brexit, and the never-ending Greek story. However,
the concerns connected with the European elections are significantly overstated.
There are, of course, downside risks, but their probabilities are very low.
Surely, it may be smart to allocate some funds into gold as a hedge in uncertain
times, but any gains may be limited due to the upward pressure on the U.S.
dollar. And the gold prices will probably decline after these elections finally
take place. As a reminder, 2016 was also a very volatile year for political
risk, with Brexit and Trump's victory, but gold gained just 8 percent.

Thank you.

If you enjoyed the above analysis and would you like to know
more about the impact of the current macroeconomic trends and political uncertainty
on the gold market, we invite you to read the March Market
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Arkadiusz Sieron is a certified Investment Adviser. He is a long-time precious
metals market enthusiast, currently a Ph.D. candidate, dissertation on the
redistributive effects of monetary inflation (Cantillon effects). Arkadiusz
is a free market advocate who believes in the power of peaceful and voluntary
cooperation of people. He is an economist and board member at the Polish Mises
Institute think tank. He is also a Laureate of the 6th International Vernon
Smith Prize. Arkadiusz is the author of Sunshine
Profits' monthly Market
Overview report, in which he keeps subscribers up-to-date regarding key
fundamental developments affecting the gold market and helps them prepare for
the major changes.